Restructuring Corporate Debt In Challenging Times
- Created: Friday, April 10 2020 16:38
The two principal methods of restructuring corporate debt in Ireland are (1) examinership and (2) scheme of arrangement.
Whilst examinership can ultimately result in a scheme of arrangement being approved by the Court and then implemented, a scheme of arrangement in isolation is a different process and different procedures apply.
In this article, we outline both processes.
Examinership is one of Ireland’s key rescue processes for insolvent companies.
In brief, examinership is a court supervised rescue process lasting a maximum period of 100 days during which the company is protected from creditor action. In that time period, the company is protected from legal proceedings and enforcement by its creditors.
The 100 day maximum timeframe cannot be extended and is laid down by the Companies Act 2014 (the “2014 Act”). In fact, the statutory period is 70 days, but this can be extended by the Court on application to 100 days. In practical terms, extensions are very common and practitioners often view 100 days as the examinership period.
An insolvency practitioner, (who is the “Examiner’), is responsible for reviewing the financial position of the company and formulating proposals for a scheme of arrangement to ensure the survival of the company and all or part of its undertaking as a going concern. The proposals for a scheme of arrangement typically provide for a write down of debt across various classes of creditors, including secured creditors, in conjunction with fresh investment.
This scheme will often involve new investment either from existing stakeholders or third parties. Where a number of parties express an interest in investing in the company, the Examiner may select whichever party he believes will offer the greatest prospect for the company’s survival as a going concern. The courts have been very clear that the process is not intended or designed to protect shareholder interests. This will invariably result in the shareholders of a company losing control of the company.
MacSweeney & Company was involved in a complex examinership in 2019, which involved a large Irish and UK construction company named Vision Built, and which entailed competing bidders. That resulted in an effective acquisition of the company by the large construction company Sisk.
Schemes of Arrangement
A different scheme of arrangement is possible under Part 9 of the 2014 Act. This provides for a “company” to enter into a compromise or arrangement with (a) its creditors or any class of them or (b) its members or any class of them.
A scheme of arrangement is a flexible tool and can facilitate a broad range of possible arrangements between a company and its creditors or members. For example, the recent acquisition of Independent News and Media Plc by the Belgian media company Mediahuis NV was implemented by way of a scheme of arrangement.
It is separate and distinct from the examinership process (and the schemes of arrangement used within that process). One key difference is that its deployment neither requires that a company is insolvent nor that the company has a reasonable prospect of survival if it is insolvent. On the other hand, this is a necessary prerequisite of examinership, and which results in lengthy expert reports being commissioned and put before the Court.
In order for a scheme of arrangement under Part 9 of the 2014 Act to take effect:
- the scheme of arrangement must be approved by a special majority (representing 75% or more in value of the creditors/ members present and voting) at the required meetings of classes of creditors/ members;
- notice of the passing of such resolutions at the scheme meeting(s) and that an application will be made to the High Court to sanction the scheme of arrangement; and
- the High Court must sanction the scheme of arrangement.
Whilst it is possible to convene the initial meeting of creditors without any prior order of the High Court, where the members or creditors cannot be readily classified or a high value scheme is being implemented, it is possible to apply beforehand to the High Court for an order convening the meeting. This should be considered where there is any ambiguity, as any incorrect constitution of the classes of creditors could result in the scheme being subsequently refused by the High Court, thereby resulting in the failure of the scheme.
Another consideration is whether the company requires protection from its creditors whilst the scheme is being proposed. Section 451 of the 2014 empowers the Court to stay all proceedings, in a similar manner to the protection afforded during the examinership period. This may be done “as the court deems fit” and no specific time period is prescribed in the 2014 Act. An application for this protection could be made on the Court being asked to convene the meeting.
Therefore, in practical terms, a successful scheme may involve three steps being the initial application to the High Court to convene the meetings of classes of creditors/ members, secondly the meetings themselves at which the scheme is proposed, and thirdly the subsequent application to Court to sanction the scheme.
The applicable test that the High Court will consider in considering whether or not to sanction the scheme was set out by Mr Justice Kelly in the case of Re Colonia Insurance (Ireland) Ltd  1 IR 497 (“Colonia”). Kelly J. out the following five criteria required to be satisfied in order to sanction a scheme being that:
- sufficient steps have been taken to identify and notify all interested parties;
- the statutory requirements and all directions of the court have been complied with;
- the classes of creditors are properly constituted;
- no issue of coercion must arise; and
- the scheme of arrangement is such that an intelligent and honest man, a member of the class concerned, acting in respect of his interest might reasonably approve it.
The fifth of the above criterion is often the most open to subjective determination by the High Court. In the Colonia case, Kelly J. stated that the Courts should be slow to differ from the vote at the relevant meeting. Kelly J. stated that the court should only differ from the majority if it is satisfied that an honest, intelligent and reasonable member of the class could not have voted for the Scheme. The onus is on the objecting creditor to establish this and it must do so on balance of probabilities.
A scheme of arrangement results in a Court order that is automatically recognisable and enforceable throughout the EU. Furthermore, an Irish scheme of arrangement is capable of recognition in the US under the Chapter 15 recognition process and this recently occurred in the case of Ballantyne Re Plc.
Whether a company should restructure its debts through the examinership process or a scheme of arrangement will always depend on the particular circumstances.
The following factors will need to be considered:
- Examinership is undoubtedly a very expensive process. The initial application can be expensive, and it involves proving through an expert’s report that the company has reasonable prospects of survival. The examinership process itself is very expensive and will involve regular applications to court to update the Judge on the process. Following that, a scheme of arrangement must be formulated and again put before the Court for consideration and approval. It is only on approval of the scheme of arrangement that the company’s debts become restructured.
- On the other hand, a scheme of arrangement under Part 9 of the 2014 Act can be more focused on the implementation of a restructuring, even where insolvency is not an issue. As the process does not involve any expert report, or multiple court applications, it is invariably less expensive.
- An examinership application may be brought in the Circuit Court, whereas a scheme of arrangement must be brought in the High Court.
- The fact that the company does not need to prove to the Court that it is insolvent or show that it has a reasonable prospect of survival is a distinct advantage of the scheme of arrangement process.
- A scheme of arrangement requires 75% of creditors in each class to approve it, whereas a scheme of arrangement at the conclusion of an examinership process only requires 51% approval.
- Unlike examinership, there is no restricted time period within which the company must formulate or put into effect the scheme of arrangement. This will avoid the company being placed under a very tight timeframe, which if not met, will result in the liquidation of the company.